Question

Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2, 3 and 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 10%. How much would the NPV change if discount rate increases to 14%?

Answer 1

Project A at 10%

NPV = (450000 * 0.909) + ( 270000 * 0.8264) + ( 270000 * 0.7513) + ( 270000 * 0.6830) + ( 200000 * 0.6209) –920000

       = 1143619 – 920000

          = 223619

Project A at 14 %

NPV = (450000 * 0.8772) + ( 270000 * 0.7695) + ( 270000 * 0.6750) + ( 270000 * 0.5921) + ( 200000 * 0.5194) –920000

       = 1048502 – 920000

          = 128502

NPV will decrease by 95117